Financial trading transactions typically involve two or more parties exchanging a financial instrument, such as a security, in exchange for value. After the parties agree to enter into the transaction, they make arrangements to settle the transaction, i.e., to actually effectuate the transfer of the securities to the buyer. The post-trade settlement process may also include independent third parties such as escrow agents and custodians, who hold the property or payment of one party in anticipation of the future transfer of securities. However, there is always a risk to the parties that the transaction may never actually settle.
In the global securities market, the risk of settlement failure is increased by the complexity of the transactions. For example, an orderer, who is either a buyer or a seller, will issue a trade instruction to his broker/dealer who executes the trade and sends a notice of execution back to the orderer. The orderer then transmits the trade details and allocations to his broker/dealer who either accepts or rejects the trade details and allocations and transmits an acceptance or rejection back to the orderer. If the trade details and allocations are accepted, the broker/dealer provides additional information related to the trade and transmits a trade confirmation to the orderer. The orderer must then validate the information included in the trade confirmation and respond with an affirmation—representing the formation of a legally binding contract for the transaction. Both the orderer and the broker/dealer then transmit the trade to their respective settling agents who must arrange for the instructed exchange of funds and securities on the settlement date.
The number of parties and exchanges involved complicates the post-trade process, lengthening settlement times and consequently increasing the risk to parties of settlement failure. To minimize this risk, markets worldwide have attempted to standardize a deadline for completion of the settlement procedures to within a set number of days of the trade date. In the United States, the Securities and Exchange Commission, which regulates transactions involving the transfer of securities and the exchanges that operate the markets where securities are traded, has mandated that U.S. securities must be settled within three days of the trade date. Transactions that are not settled within this time frame result in settlement failure and represent a significant risk to both brokers and traders.
There are known systems in the art that enable parties to evaluate the performance of their brokers in the post-trade settlement process. For example, WO 01/75730 A2 to Skuriat describes a system in which the performance of brokers in the post-trade settlement process is evaluated based on how much time it takes the broker to complete each step in the post-trade process. The longer the amount of time taken by the broker, the lower his ranking in the Skuriat system.
There is, however, no system currently available that tracks the settlement fail rate of brokers or that evaluates brokers in terms of their ability to settle trades within the time frame required by the market.